1

Kalyani Steels Limited

HOLD Target Price: Rs.260.00

CMP: Rs.227.70 Market Cap.: Rs.9843.75mn.

Date: 06 March, 2010

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 6.23 9.07 8.47

PAT Margin (%) 0.33 3.53 3.22

ROE (%) 0.64 7.17 6.70

ROCE (%) 3.91 8.60 8.25

P/BV(x) 1.91 1.77 1.65

P/E(x) 297.84 24.72 24.67

EV/EBDITA(x) 15.90 9.62 9.37

Debt equity Ratio 0.48 0.47 0.46

Key Data:

Sector Iron & Steel

Face Value 10.00

52 wk. High/Low (Rs.) 224.50/36.10

Volume (2 wk. Avg.) 54000

BSE Code 500235

SYNOPSIS

• We initiated the coverage of Kalyani Steels Ltd and

set a target price of Rs.260.00.

• Kalyani Steels Ltd, is a part of the over $2.1 billion

Kalyani Group. Kalyani Steels Ltd is a leading

manufacturer of forging and engineering quality

carbon & alloy steels using the Blast Furnace route.

• The company’s captive power plant ensures regular

power supply of 8 MW.It also plans to add 30-40 M

wt power generation capacities to achieve self

sufficiency in power requirements.

• The Company manufacturing unit is located at

Ginigera, Karnataka and has capacity of producing

650,000 TPA of carbon and alloy steels.

• KSL has signed a Memorandum of Understanding

(MoU) with West Bengal Industrial Development

Corp to set up steel plant. It requires an investment

of Rs.65 billion.

• The top line of the company is expected to grow at a

CAGR of 8% over 2008A to 2011E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

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Table of Content

Investment Highlights ......................................................................................................... …03

Company Profile…………………………………………………………………………………………………………………….04

Company Products.…………………………………………………………………………………………………………………….07

Peer group companrision…...……………………………………………………………………………………………………..08

Key concern ............................................................................................................. ……………08

Financial……………………………………………………………………………………………………………………………..…09

Charts ................................................................................................................................... 11

Outlook and conclusion ......................................................................................................... 13

Industry overview ................................................................................................................. 14

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Investment Highlights

• Q3 FY10 Results Update

For the quarter ended on December 31, 2009 (Standalone) the company has registered a

153 % (YOY) growth in the net sales and stood at Rs.3293.36 mn from Rs.1303.41 mn of

the corresponding period of the previous year. During the quarter, Net Profit stood at

Rs.135.82 million from Rs.86.37 million in previous year same quarter. The Basic EPS of

the company stood at Rs.3.11 for the quarter ended December 2009.

EPS of the company for the quarter stood at Rs.3.11

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• Issue of Secured Redeemable Non-Convertible Debentures

Kalyani Steels has approved issue of Secured Redeemable Non-Convertible Debentures,

aggregating to Rs 450 Million, on Private Placement basis.

• Kalyani Steels enters into a Joint Venture Agreement with Gerdau S.A., Brazil

Kalyani Steels Ltd (KSL) signed a Joint Venture Agreement with Gerdau S.A., Brazil. As per

this agreement, both companies will have an equity partnership of 45% each in SJK Steel

Plant Ltd and the remaining 10% will be owned by other investors.

• Both companies to have an equity partnership of 45% each in SJK Steel Plant Ltd.

• SJK Steel Plant Ltd, which was recently acquired by Kalyani Steels, is an integrated

Alloy Steel Plant with an annual capacity of 275,000 TPA, spread over an area of 900

acres.

• The Kalyani Gerdau JV plans to enhance its capacity to 1.6 million TPA of finished

steel, in the next few years.

Company Profile

Kalyani Steels Ltd, is a part of the over $2.1 billion Kalyani Group. Kalyani Steels Ltd is a leading

manufacturer of forging and engineering quality carbon & alloy steels using the Blast Furnace

route.

The Kalyani Group set up a new plant to manufacture steel using the less power intensive mini-

blast furnace route. The new facility is at Ginigera in the Hospet-Bellary region of Karnataka

state, where iron ore is abundantly available. This integrated steel complex has capacity of

400,000 tpa of carbon and alloy steels, which is being expanded to 650,000 tpa.

Kalyani Steels has been continuously upgrading its technology and infrastructure. The facilities

at KSL are at par with any sophisticated steel manufacturers in the world.

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Although the forging industry in India is the primary market for the company’s products,

markets of various components for commercial vehicles, two wheelers, diesel engines,

bearings, tractors, turbines and rail also form a substantial part of the company’s clientele.

KSL has earned the status of preferred steel supplier for engineering, automotive, seamless

tube and primary aluminum industry.

• Integrated Operations

• Captive Iron Ore

KSL operates its mines in Bellary region of Karnataka.

Aggregated Mining Area - 235 hectares

Estimated Reserves - 27 million tones

FE content more than 65%

KSL has iron ore reserves sufficient for its present and future requirements. Mine proximity

to all steel plants ensures availability of quality iron ore on continuous basis.

• Captive Coke

Captive coke plant is set up in Bellur Industrial Estate in Dharwad, Karnataka, about 150 kms

from Ginigera Steel Plant. This is joint venture between Kalyani steels Ltd and Gujarat NRE

Coke Ltd.

• Installed capacity 325000 MT

• Eight coke batteries

• Each battery has 20 pusher type ovens

• Capacity 9.5 tonnes per charge

• Cycle time 30-40 hours

• Stamp charging facility with Quenching Car Tower

• Owned railway sidings, for minimal wastages

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• Captive Power Plant

The activity involves generation of electricity out of the flue gases produced from Blast

Furnaces. Part of the flue gases from Blast Furnace is used to heat the blast air in the

Metallic Blast Preheater and balance quantity is used to generate electricity by recovering

the enthalpy of Blast Furnace gases in a Boiler specifically designed. The Generated

electricity is used for captive consumption and is synchronized with a Karnataka state

power transmission Ltd. grid. The grid serves to absorb any voltage fluctuations and safe

guard against power trips. The captive power plant ensures regular power supply of 8 MW.

KSL have plans to add 30-40 M wt power generation capacities to achieve self sufficiency in

power requirements.

All the above integrated operations make KSL a self reliant special steel manufacture.

• Plant Capacities

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Company Products

• Steels

KSL manufactures wide range of steel of different grades. It manufactures carbon alloy and

special steel for automobile, oil engine manufacturing and forging sectors, seamless tubes

and low electrical resistively steel for primary aluminum industry.

• Products for engineering applications

KSL supplies high quality Carbon Alloy and special steels to leading companies in

automobile, oil engine manufacturing and forging sectors. Supplies also include high quality

steel to its parent company, Bharat forge ltd towards the manufacture of a wide range of

forgings and machined components for the automotive diesel engine, railway,

earthmoving, cement ,sugar, steel, coal, ship-building and oilfield industries as well as

general engineering equipments.

Products manufactured using steel from KSL are sourced by leading international OEM's -

their complex forging requirements include machined crankshafts, front axle beams and

steering knuckles.

• Products for Seamless Tube Industry:

KSL is leading manufacturer of rounds for seamless tubes in India. It supplies steel to all

seamless tube producers in the domestic market. KSL's Ginigera plant is approved by Indian

Boiler Regulation as:

a. Well-known steel maker for supply of boiler grade quality steel.

b. Creep resistant steel grades like SA213-T11 & SA213-T22, for use at elevated

temperatures.

KSL offers range of carbon alloy steel as per major international specifications such as SAE,

BS, DIN, JIS and API. Indian Boiler Regulation (IBR) has also approved KSL for supply of steel

to critical seamless tubes applications such as boiler tubes.

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• Products for Aluminium Industry:

KSL Recommended LER steel: KSL offers Low Electrical Resistivity steel (LER) steel,

developed specifically for primary aluminium industry to reduce level of electrical

resistance within the steel during the electrosis process of aluminium smelting.

Extensive tests at Indian Institute of Technology, Mumbai with large numbers of steel

grades, under elevated temperatures up to 800° centigrade, gave birth to LER steel, a

product that offer considerable reduction in electrical resistance over other grades

commonly used for this applications.

• Pig iron

It manufactures pig iron catering to industries like steel making, casting and aluminium.

Peer Group Comparison

Name of the company

CMP

(Rs)

Market

cap

(Rs.mn)

EPS

(Rs.) P/E (x) P/BV(x)

Dividend

(%)

Kalyani Steels Limited 227.70 9843.75 0.76 297.84 1.91 0.00

ISMT 54.15 793.30 4.77 11.35 1.63 20.00

Sunflag Iron and Steel Company 30.80 499.57 4.85 6.35 1.52 5.00

Sujana Metal Products 32.50 225.08 4.63 7.02 0.69 0.00

Key Concerns

• Absence of collaborative and competitive approach

• Demand creation and distribution channel problems.

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Financials

Results Update 12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 9818.35 9928.18 11273.98 12401.38

Other Income 114.31 210.85 66.99 73.69

Total Income 9932.66 10139.03 11340.97 12475.07

Expenditure -8502.60 -9520.06 -10318.08 -11424.15

Operating Profit 1430.06 618.97 1022.89 1050.92

Interest -185.58 -284.37 -234.35 -236.12

Gross Profit 1244.48 334.60 778.54 814.79

Depreciation -194.16 -320.01 -321.17 -334.02

Profit before Tax 1050.32 14.59 462.57 480.77

Tax -257.84 18.46 -80.08 -81.73

Profit after Tax 792.48 33.05 398.24 399.04

Extraordinary Items 0.03 0.00 0.00 0.00

Net Profit 792.51 33.05 398.24 399.04

Equity Capital 436.53 436.53 436.53 436.53

Reserves 4687.74 4720.80 5119.04 5518.08

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS 18.15 0.76 9.12 9.14

*A=Actual, *E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10

Description 3m(A) 3m(A) 3m(A) 3m(E)

Net Sales 1994.97 2494.69 3293.36 3490.96

Other Income 4.81 37.21 11.89 13.08

Total Income 1999.78 2531.90 3305.25 3504.04

Expenditure -1872.72 -2207.85 -3025.83 -3211.68

Operating Profit 127.06 324.05 279.42 292.36

Interest -62.57 -79.13 -50.07 -52.57

Gross Profit 64.49 244.92 229.35 239.78

Depreciation -77.01 -77.70 -79.05 -82.21

Profit before Tax -12.52 167.22 150.30 157.57

Tax 0.00 -34.09 -14.48 -15.76

Profit after Tax -12.52 133.13 135.82 141.81

Equity Capital 436.53 436.53 436.53 436.53

Face Value(Rs) 10.00 10.00 10.00 10.00

EPS -0.29 3.05 3.11 3.25

*A=Actual, *E=Estimated

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Charts

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1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of Rs.227.70 the stock is trading at 24.72 x and 24.67x for

FY10E and FY11E respectively.

• Price to Book Value of the stock is expected to be at 1.77 x and 1.65 x respectively for

FY10E and FY11E.

• Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen at

Rs.9.12 and Rs.9.14 respectively.

• The top line of the company is expected to grow at a CAGR of 8% over 2008A to 2011E.

• The company has national and international clients like Alcan Iceland, Caterpillar Inc, Ford,

Volvo, Ashok Leyland, Jindal Saw, Automobile Axles, Indian Railway and Tata Motors,

among others.

• The Company manufacturing unit is located at Ginigera, Karnataka and has capacity of

producing 650,000 tpa of carbon and alloy steels.

• On the basis of EV/EBITDA, the stock trades at 9.62 x for FY10E and 9.37 x for FY11E.

Kalyani Steels Ltd BSE SENSEX

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• The Kalyani Gerdau JV plans to enhance its capacity to 1.6 million TPA of finished steel, in

the next few years.

• The captive power plant ensures regular power supply of 8 MW. KSL have plans to add 30-

40 M wt power generation capacities to achieve self sufficiency in power requirements.

• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.260.00 for Medium

to Long term investment.

Industry Overview

Sector structure/Market size

The steel industry in India has been moving from strength to strength and according to the

year-end review by the Press Information Bureau, India has emerged as the fourth largest

producer of steel in the world and the second largest producer of crude steel.

Significantly, state-owned steel maker, Steel Authority of India (SAIL), which reported a net

profit of US$ 571 million in January-June 2009, has become the most profitable steel company

globally, beating steel majors such as ArcelorMittal, Posco, Bao Steel and Nippon in the half

yearly profits.

Production

Steel production reached 28.49 million tonne (MT) in April-September 2009.

The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20.

Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry

of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12. In fact,

based on the status of memoranda of understanding (MoUs) signed by the private producers

with the various state governments, India's steel capacity is likely to be 293 MT by 2020.

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Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the

total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels

and retail stores is growing immensely.

India's steel consumption rose by 6.8 per cent during April-November 2009 over the same

period a year ago on account of improved demand from sectors like automobile and consumer

durables.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16

per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.

The scope for raising the total consumption of steel is huge, given that per capita steel

consumption is only 35 kg – compared to 150 kg across the world and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail

outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail

outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at

least 10-15 per cent of their total production to be sold by their retail outlets.

Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000

outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two

years.

Exports

Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported.

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India's iron ore exports more than doubled to 9.3 million tonne in October 2009 as compared to

4.4 million tonne in the same month a year ago on the back of increase in demand from

Chinese steel producers, as per a joint study by a group of iron ore exporters.

Iron ore is a key input in steel making. The country’s iron ore exports during April-October 2009

period grew 20 per cent over the year ago period to 53 million tonne, as per the study.

Investments

A host of steel companies have lined up major investment proposals. Furthermore, with an

expanding consumer market, the Indian steel industry is likely to receive huge domestic and

foreign investments. The domestic steel sector has attracted a staggering investment of about

US$ 236 billion.

This consists of nearly 222 MoUs signed between the investors and various state governments

mostly in the states of Orissa, Jharkhand, Chhattisgarh and West Bengal.

• According to the Investment Commission of India investments of over US$ 30 billion in

steel are in the pipeline over the next 5 years.

• Tata Steel has raised US$ 500 million by issuing 'global depository receipts' (GDRs)

aiming at expansion of its Jamshedpur plant and overseas mining projects.

• The state-owned Steel Authority of India Ltd (SAIL) will invest US$ 724.12 million to set

up a 4-million tonne per annum steel mill at its Bhilai Steel Plant.

• SAIL is also planning to set up a 12-million tonne plant in Jharkhand.

• Stainless steel manufacturer and exporter, Varun Industries, is setting up a US$ 171.63

million stainless steel-cum-alloy steel plant at Rohat, Jodhpur.

• India’s largest engineering conglomerate Larsen & Toubro (L&T) and state-owned

Nuclear Power Corporation of India Limited (NPCIL) have formed a US$ 370.09 million

joint venture for specialised steel and forging products.

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Government Initiative

Subsequent to the recent fall in international prices of commodities and to protect Indian

producers, the Indian government has announced some changes in customs duty rates, which

were effective from November 2008.

The government has removed full exemption of customs duty on some industrial and

agricultural commodities. Iron and steel products like pig iron, spiegeleisen, semi-finished

products, flat products and long products are now subject to a basic custom duty of 5 per cent

ad valorem.

The Indian government plans to invest over US$ 350 billion in industries related to

infrastructure and construction which will give a fillip to the steel sector.

Moreover, in the Union Budget 2009-10, the government has made a 23 per cent hike in

allocation for highway development and US$ 1.034 billion increase in budgetary support to

Railways which will further promote the steel industry.

Road ahead

While the demand for steel will continue to grow in traditional sectors such as infrastructure,

construction, housing, automotive, steel tubes and pipes, consumer durables, packaging, and

ground transportation, specialized steel will be increasingly used in hi-tech engineering

industries such as power generation, petrochemicals, fertilizers, etc. The new airports and

railway metro projects will require a large amount of stainless steel.

According to an estimate, with the growing need for oil and gas transportation infrastructure, a

US$ 118 billion opportunity is waiting to be tapped by steel manufacturers in the next five

years. Indian steelmakers are set to make the most of booming global demand for steel pipes

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and tubes with the government withdrawing the 10 per cent duty on the exports of these

products. According to a study by ICICI Direct, Indian steel companies are likely to get 19 per

cent of the total global demand in the years to come.

____________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but we do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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